Indian Equities: Any Value in IFB Agro Industries

IFB Agro Industries is in the business of producing alcohol (70% to 75% of revenues) and marine products.

The company is based out of the state of West Bengal (WB), which is well known for its regressive attitudes towards businesses.

In the alcohol segment, it distributes ‘Volga’ vodka, ‘Jubilation’ rum, ‘Benjamin’ brandy (latter two launched recently). Demand in the Indian Made Foreign Liquor (IMFL) appears to have a promising outlook with growth estimated at about 20% per annum. It has also installed a new plant to enhance its country liquor production capacity since demand was outstripping supply – however, licenses weren’t granted by the state as at the end of last year.

In the marine segment, it distributes frozen marine products in the major metros through retail chains under the “IFB Royal” brand. It also has a 48% market share in the shrimp feed trading business. It had recently enhanced capacities in the marine division including new IQF machines and cold room facilities.

The company has reported somewhat erratic overall profitability during the last five years on a growing revenue base – reporting a record high of 50cr in operating profits on revenues of almost 600cr in the last financial year. It operated with a net cash position (including liquid investments) of over 15cr as at 31stMarch, 2012.

One of the key risk factors that impact this business appears to be its dependence on the state government in various aspects of its business from reimbursement for molasses transport and CDM benefits for use of rice husk in the grain distillery to allotment of ‘privilege’ land for country liquor and export benefits in the marine segment.

The reimbursement for molasses transport and allotment of privilege land were revoked by the state government last year and these should be removed in any future estimate of earnings. Other factors such as CDM benefits depend on the local availability of rice.

Another key factor that impacts this business is the availability of molasses, which is the raw material for the distillery. Due to the removal of above state benefit for transport, this business is no longer viable since the price of rectified spirit from nearby states is much cheaper.

Increases in costs of grain (due to lack of availability or otherwise), fuel, electricity, and transportation reduce profit margins of the grain distillery.

The state implemented MRP based pricing for country spirit, which acts as a ceiling and intensified competition among existing bottlers who are bringing out their own branded products. This business is exposed to the whims of state government in providing licenses despite installation of a new plant leading to idle capacity. The removal of the privilege area has reduced barriers of entry for new competitors. Moreover, additional capacity installation would be problematic due to the difficulty in obtaining land for commercial use in WB.

The lucrative IMFL segment is exposed to intense competition from large Indian and multi-national brands where the company does not yet have any meaningful competitive edge.

The company is a net exporter in the marine segment and likely to be adversely impacted by a strengthening INR. It is also exposed to rises in the cost of raw materials for marine products. Management expects to aggressively market its marine products to penetrate the Indian retail segment – which is likely to entail large expenditures in the near future that will reduce profits from this segment.